Gratuity Calculator

What is Gratuity?

Gratuity is a monetary benefit given by employers to employees as a token of gratitude for their long-term service. It is governed by the Payment of Gratuity Act, 1972 in India. Under this act, any organization with 10 or more employees is required to pay gratuity to eligible employees.

The gratuity amount is calculated based on your last drawn salary and years of service. With the new Labour Code 2020 implemented in 2025, there have been significant changes including reduced eligibility period for fixed-term employees and increased tax exemption limit.

Gratuity Eligibility Criteria

To be eligible for gratuity, you must meet the following conditions:

• Minimum Service: 5 years of continuous service (or 1 year for fixed-term employees under new Labour Code)
• Employment Type: Full-time, part-time, or fixed-term employees covered under the Act
• Organization Size: Employer must have 10 or more employees
• Termination: Eligible upon resignation, retirement, superannuation, death, or disablement

Exceptions to 5-Year Rule

• Death: Gratuity payable to nominee regardless of service period
• Disability: Payable if disabled due to accident or disease
• Fixed-term Employees: Eligible after 1 year under new Labour Code
• Retrenchment: Some cases may qualify with less than 5 years

Gratuity Calculation Formula

The gratuity amount is calculated using this formula:

Understanding the Formula Components

• Last Drawn Salary: Basic Salary + Dearness Allowance (DA) only. Excludes HRA, conveyance, special allowance, etc.
• 15: Represents 15 days' wages for each completed year of service
• 26: Number of working days in a month (for private sector). Government uses 30 days.
• Years of Service: Rounded to nearest year. 6+ months = 1 year, less than 6 months ignored

Calculation Example

Let's calculate gratuity for an employee with:

• Monthly Basic + DA: ₹50,000
• Years of Service: 10 years 7 months
• Sector: Private

Calculation:

(₹50,000 × 15 × 10.58) ÷ 26 = ₹3,05,769

Since ₹3,05,769 is below ₹25 lakh cap, entire amount is tax-free.

New Gratuity Rules 2025 (Labour Code)

The new Labour Code 2020, implemented in 2025, brought several significant changes:

1. Reduced Eligibility for Fixed-Term Employees

Fixed-term employees (contract workers) are now eligible for gratuity after completing just 1 year of continuous service, compared to 5 years for permanent employees. This is a major change benefiting millions of contract workers in India.

2. Increased Tax Exemption Limit

The maximum tax-exempt gratuity amount has been increased to ₹25,00,000 (from ₹20 lakhs earlier). This means you can receive up to ₹25 lakhs tax-free when leaving an organization.

3. Part-Time and Gig Workers

The new code recognizes part-time workers and gig economy workers, making them eligible for gratuity on a pro-rata basis based on their working hours.

4. Payment Timeline

Employers must now pay gratuity within 30 days from the date it becomes due. Failure to do so attracts interest penalty at 10% per annum.

Tax Treatment of Gratuity

For Government Employees

100% tax-free - Government employees (Central/State/Local) don't pay any tax on gratuity received, regardless of the amount.

For Private Sector Employees

Tax exemption is available for the least of the following three amounts under Section 10(10):

1. Actual gratuity received
2. ₹25,00,000 (maximum limit)
3. 15 days' salary × years of service (based on last drawn salary)

Tax Calculation Example

If you receive ₹30,00,000 as gratuity:

• Tax-free amount: ₹25,00,000 (maximum exemption)
• Taxable amount: ₹5,00,000 (added to your salary income)
• Tax at 30% slab: ₹1,50,000 (approximately)

Important Note on ₹25 Lakh Cap

The ₹25 lakh exemption is cumulative across all employers in your lifetime. If you received ₹15 lakhs tax-free from a previous employer, you can only claim ₹10 lakhs exemption from your next employer.

When is Gratuity Payable?

Gratuity becomes payable upon the following events:

• Resignation: After completing eligible service period
• Retirement/Superannuation: Upon reaching retirement age
• Death: To nominee/legal heir (no minimum service required)
• Disablement: Due to accident or disease (no minimum service)
• Retrenchment: As per Industrial Disputes Act
• Voluntary Retirement: Under VRS scheme

Forfeiture of Gratuity

Employers can forfeit (not pay) gratuity in the following cases:

• Employee is terminated for riotous or disorderly conduct
• Employee is terminated for offense involving moral turpitude
• Willful destruction of employer's property (up to the value of damage)
• However, even in these cases, if there's a death or disability, gratuity must be paid

How to Claim Gratuity

1. Application: Submit Form I (Application for Gratuity) to employer
2. Calculation: Employer calculates amount and issues notice within 15 days
3. Payment: Payment must be made within 30 days of gratuity becoming due
4. Nomination: Ensure nomination is filed using Form F
5. Disputes: If employer refuses, approach Controlling Authority within 90 days

Tips to Maximize Your Gratuity

1. Complete 5 Years: Don't resign just before completing 5 years
2. Track Service: Maintain records of joining dates and breaks
3. Basic Salary: Higher basic salary means higher gratuity
4. Last Month Strategy: If possible, defer resignation after salary increment
5. Nomination: Always nominate family members using Form F
6. Continuous Service: Avoid breaks in employment where possible
7. Documentation: Keep salary slips and appointment letters

Gratuity vs Other Benefits

Gratuity vs Provident Fund (PF)

While both are retirement benefits, they differ significantly: PF is a contributory scheme (employee + employer contribution), while gratuity is entirely employer-funded. PF is paid monthly after retirement, gratuity is a lump sum. Use our PPF Calculator to plan additional retirement savings.

Gratuity vs Pension

Pension is a monthly payment for life (for government employees), while gratuity is a one-time lump sum. Private sector employees typically don't get pension but may get gratuity. Consider SIP investments to create your own pension.

Common Gratuity Mistakes to Avoid

• Not completing 5 years: Many employees resign just short of 5 years
• Wrong salary consideration: Only Basic + DA counts, not gross salary
• Ignoring nomination: Without nominee, family faces legal hassles
• Not claiming: Some employees simply forget to claim gratuity
• Wrong calculation: Employers sometimes miscalculate - always verify
• Tax planning: Not considering tax impact when receiving large gratuity

Calculate Your Gratuity Now

Use our free gratuity calculator above to estimate your gratuity amount. Simply enter your basic salary + DA, years of service, and select your sector type. The calculator will show you the exact amount you're eligible for, along with tax implications.

Remember, gratuity is your right after years of dedicated service. Make sure you claim it and plan your finances accordingly. For long-term wealth creation, explore our other financial calculators.